August 2013 Dispute Perspectives Effective use of Damages Experts in International Arbitration
From the Editor s desk Vidya Rajarao National Leader, Forensic Services Email: vidya.rajarao@in.pwc.com Dear Friends, Welcome to our sixth issue of Dispute Perspectives a periodic newsletter that will provide you with a focused analysis of ongoing trends in dispute resolution in India. The launch event of our survey, corporate attitudes and practices towards arbitration in India, threw some interesting thoughts on use of damages experts in international arbitration. In this issue, we have discussed some of the dos and donts of having damages experts in an international arbitration. I am also pleased to share you tube links to our launch event panel discussions in all the three cities, Chennai, Bangalore and Mumbai. Hope you find the discussion interesting. We, of course, look forward to hearing from you. I believe that we should be able to assist you or at least guide you in your pursuit of finding the most efficient and effective way to resolve disputes. Should you have any questions, concerns or suggestions for future topics, please feel free to write to us. 2 PwC
01 The growth in international trade and globalisation has resulted in cross-border mergers and acquisitions as well as growing number of bilateral and multilateral investment treaties. Inevitably, this has led to numerous cross-border disputes between companies and sovereign governments. Increasingly, arbitration is the preferred choice for resolving cross-border disputes. A recent study found that 91% of companies, who have a dispute resolution policy, include arbitration and not litigation for resolution of domestic or cross border disputes 1. Further, damages claimed and awarded in international arbitration are also increasing in value and damage awards of USD 1 billion are not uncommon 2. With the consequent increase in damages awarded and the complexity of damage calculations, the use of experts to quantify damages is quite common. Against this backdrop, use of experts appointed by the parties to quantify damages is a growing trend. A recent study by White & Case and the School of International Arbitration at the Queen Mary University of London found that in the vast majority of arbitrations, expert witnesses are appointed by the parties (90%) rather than by the tribunal (10%) 3. This article will examine the effective use of a damages expert, when not to use such experts and authoritative guidance with respect to use of experts to quantify damages. 1 Survey results titled: Corporate attitudes and practices towards Arbitration in India 2013 published by PricewaterhouseCoopers Private Limited 2 Michael D. Goldhaber, Focus Europe, Arbitration Scorecard, The American Lawyer, 2013 available at http://www.americanlawyer.com/ PubArticleTAL.jsp?id=1202608198051&Arbitration_Scorecard_2013&slreturn=20130622042718 3 The 2012 International Arbitration Survey: Current and Preferred Practices in the Arbitral Process. 3 PwC
02 Guidance regarding use of experts In May 2010, the International Bar Association (IBA) issued the IBA Rules on the Taking of Evidence in International Arbitration. These rules provide guidance on use of party-appointed experts and Tribunal appointed experts. Further, the rules specify the nature of disclosures that must be contained in an Expert Report (whether appointed by the parties or the Tribunal) including: 4 a. Statement regarding the expert s past relationship, if any, with any of the parties, their legal advisors and the Arbitral Tribunal; b. Statement of the expert s independence from the parties, their legal advisors and the Arbitral Tribunal; c. Description of the expert s background, qualification, training and experience; d. Statement of the facts on which the expert is basing his or her opinions and conclusions; and e. The expert s opinions and conclusions including a description of the methods, evidence and information used in arriving at such opinions and conclusions. Professional organisations that govern accountants, surveyors, appraisers, engineers etc. also have rules that govern provision of expert reports and expert testimony in litigation and arbitration. These rules place an emphasis on independence, integrity and objectivity, credibility and qualifications of an expert. In addition, these rules provide guidance on selection of an appropriate methodology that may be used to compute damages in certain instances and the factors that must be considered while selecting and applying the said methodology based on the relevant facts and circumstances. 4 IBA Rules on the Taking of Evidence in International Arbitration adopted by a resolution of the IBA Council on 29 May 2010. 4 PwC
03 Are damages experts needed in every case? Given the complexity of damage calculations and the amounts at stake, parties may view retention of damages experts as indispensable. However, this is clearly not the case since each case must be assessed on a stand-alone basis and an assessment of whether a damages expert is needed must be made early and in conjunction with counsel. Cases that require fairly complex valuation methodologies or financial modelling such as the discounted cash flow (DCF) method, internal rate of return etc. would benefit from an expert who is well versed with such techniques. Similarly, cases that revolve around interpretation and application of complex accounting principles as in the case of revenue recognition under long term contracts, valuation of financial instruments etc. would benefit from an expert who has substantial experience in these fields. The client and counsel should jointly assess the facts and legal basis of their claims and involve damages experts early such that the appropriate documents needed to prove damages (assuming liability) and the amount of possible damages can be estimated reliably. Such estimate of damages can greatly benefit the client and counsel in developing their legal case. 5 PwC
How (Not) to use damages experts? Damages experts should be used carefully and their remit and mandate should be clearly codified in a retention letter. It is important that clients or counsel be aware of the risks in using damages experts improperly. Damages experts should be independent, objective and credible in their methodology, assumptions, conclusions and opinions. Damages experts should be wary of the following traps: 1. An expert should not be used to evidence facts or cure the facts of the case. This aspect is best handled by counsel or fact witnesses. 2. An expert should not be an advocate for the client. Advocacy is the prerogative of counsel and is best done by counsel. An expert should be independent, objective and open minded to the methodology used to compute damages, the assumptions used and the sensitivity of such assumptions on the damages computed. 3. An expert should not defend facts and should be willing to change the quantum of damages if the underlying facts or assumptions change. This will lend credibility to the experts damages quantification and the Tribunal is more likely to consider such experts views rather than an expert who is wedded to the facts and is unwilling to consider facts that have been successfully challenged by the counter-party or proven wrong during the arbitration hearings. 4. An expert should not be retained simply because the counter-party has an expert. Counsel may often advise clients to retain experts in this instance but it is worth exploring whether an expert is needed at all and for a purpose other than to counteract an expert from the other side. 5. An expert should not be retained to undertake fairly simple mathematical calculations or to summarise amounts stated in various fact witness statements even if such calculations require fairly laborious evaluation of numerous documents and fact witness statements. In this instance, an expert s work is to merely compute or add up the various amounts presenting or simplifying information contained in several pleadings, submissions and fact witness statements in a form that is easily understood by either counsel or the arbitration tribunal. 6 PwC
04 and Damages experts, retained (early) and used properly, can add tremendous value to the arbitral Tribunal, counsel and clients. Damages experts can provide an independent, objective and credible determination of the damages due and this can only be achieved if the damages expert retains his or her independence from the counsel, client and facts of the case. In summary, damages experts should not trade independence for advocacy acquiescence to counsel or client demands. 7 PwC
05 Survey Launch video links The launch events took place in three cities, Chennai on June 22, Bangalore on June 24 and Mumbai on June 29. The key note address was delivered by esteemed Supreme Court and High Court justices followed by a panel discussion on key findings of the survey, moderated by Vidya Rajarao, National Leader, Forensic Services and Darshan Patel, Executive Director, Forensic Services. Watch the videos here Chennai Key note address: Honourable Mr. Justice Doraiswamy Raju (Retired Supreme Court) Panelists: Honourable Mr. Justice Doraiswamy Raju (Retired Supreme Court) Mr. S. Mahalingam, Ex-Chief Financial Officer, Tata Consultancy Services Mr. N.L. Rajah, Board of Director, Nani Palkhivala Arbitration Centre, Chennai Links: Key note address - http://youtu.be/ghjncdppzpi Panel discussion - http://youtu.be/gcxk2h1gddu Bangalore Key note address: Honourable Justice Shivaraj V Patil Panelists: Honourable Justice Shivaraj V Patil Mr. Pramod Nair, Partner, J Sagar & Associates Mr. M R Prasanna, Formerly Group General Counsel at Aditya Birla Group and Independent Consultant Links: Key note address - http://youtu.be/imiprmbknuy Panel discussion - http://youtu.be/v65paxgv2jq Mumbai Key note address: Honourable Justice D R Dhanuka Panelists: Honourable Justice D R Dhanuka Mr. Hiroo Advani, Senior Partner, Advani & Co. Barristers- At- Law Ms. Debolina Pratap, Associate VP & Legal Head, Wockhardt Limited Links: Key note address - http://youtu.be/rg2pv1wtesq Panel discussion - http://youtu.be/rlvmxeym2ee 8 PwC
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